As my current clients know, I am a bit of a cryptocurrency enthusiast. My firm has always advertised that it accepts cryptocurrencies as payment, but I have never really made a point of encouraging anyone to pay their invoices in "crypto." As of Saturday, December 22, 2021, until further notice, my firm will provide a 10% discount on all invoices paid in Bitcoin (BTC), Cardano (ADA), and XRP.
Earlier this year I sent my clients an explanation of Bitcoin, cryptocurrency, and blockchain meant to provide those people who have heard these terms thrown about in conversation or in the news, but who don't really have the background in technology, a way to understand the basics. Here is my attempt at simplifying the concepts so that the average person can get a better handle on this exciting technology:
DISCLAIMER: Everything you are about to read is my own personal understanding of cryptocurrencies. You should conduct your own research and analysis before engaging in any cryptocurrency transactions with my firm. Me and my firm will not be responsible if you purchase cryptocurrencies and lose them. I am providing this explanation to you so that you can have basic and introductory information on cryptocurrencies as I see it, so please, again, do your own research to feel comfortable enough to engage in a cryptocurrency transaction. This is not financial or investment advice, but I would encourage you to speak with a financial advisor if you have an interest in investing in cryptocurrencies.
What is Bitcoin?
You may have heard of “Bitcoin” a lot in the news lately, especially with the latest reports that just one full Bitcoin has been worth over $50,000. Bitcoin is the first, and consequently the most well-known, cryptocurrency ever created. It uses extreme cryptographic security (hence the term “crypto”) to ensure that anyone who owns the Bitcoin has TOTAL control over how that Bitcoin is distributed, and it is at this point in time fairly anonymous. No one—not governments, not banks, not the FBI, not the CIA, not the NSA—no one can control your Bitcoin other than you (so long as you have kept your access to your Bitcoins private—discussed below).
Further, the rules that enable Bitcoin to exist provide for a finite number of Bitcoins to ever be created. In other words, unlike the United States Dollar (USD) or any other traditional "fiat" currency (i.e. currency that is not backed by or tied to anything of value), no one can "print" more Bitcoins out of thin air like the US Federal Reserve and banks do with USD under the fractional reserve banking system. The remaining Bitcoins not yet in circulation, rather, are released into the market on a reliable, predictable, and consistent basis. Hence, Bitcoin is seen by many enthusiasts as the Peoples' answer to rampant and unchecked government spending and a hedge against looming future inflation. Because it is mathematically designed to be scarce in a time when more and more fiat is flooded into the market, Bitcoin is considered to be something akin to digital gold.
Because of Bitcoin's privacy and control, not surprisingly, criminals flocked to Bitcoin after it was created in about 2008 by its mysterious and currently anonymous founder, Satoshi Nakamoto. Despite its undeniably shady beginnings, as time moved on, the legitimate private sector began to develop uses for Bitcoin and other cryptocurrencies that have the potential to overhaul our society in fundamentally positive ways, just like the internet did for communications in the 80s and 90s. Bitcoin has started a revolution not only in finance, but in all aspects of information security in our society. To understand the benefits of cryptocurrencies (and why they may fast become an ordinary part of your life), you must first understand a few things about the underlying technology known as “blockchain” and compare that to how our current system of finance operates.
The original form of blockchain is a type of “distributed ledger.” The underlying technology is complex, but in laymen’s terms, it is a record of all transactions that have ever occurred, that are now occurring, and that ever will occur on the application using the blockchain (i.e. just like how your bank statements show you a record of all the transactions you have made for that month—to whom, in what amounts, on what date, remaining balances, etc.). The important thing about blockchain is that EVERYONE using the blockchain has access to ALL of the transactions made by EVERYONE—everything is totally public and viewable. The ledger periodically updates itself and confirms the veracity of all the transactions using various different methods, which is what differentiates the various types of blockchain technologies.
Further, the most secure blockchains are not “run” by any single entity—they are designed specifically to be “decentralized” (meaning that it is simply a set of rules about how the ledger works programmed into the blockchain software that runs itself and cannot ever be turned off). When you create an account on the blockchain you agree to use that set of rules and to continue engaging in the decentralized operation of that blockchain. Everyone on the blockchain is using the same set of rules, so there is no need for a middleman or anyone to oversee the operations of the blockchain from the top down. For most public blockchains, the entire blockchain network runs on its own and can’t be stopped by any one person, company, or government. Once out in the public, the blockchain lives on its own.
The immediate response I always get from people is: ARE YOU CRAZY?! WHY WOULD I EVER WANT THE PUBLIC TO BE ABLE TO SEE MY TRANSACTIONS?!? It is at this point where most people I have talked to resist or dismiss the idea of blockchain, but if you keep an open mind, let me explain why having a public distributed ledger is actually a benefit. Because EVERYONE has a record of ALL the transactions on the blockchain, and because the blockchain is periodically updated and confirmed, it is close to impossible for there ever to be a fraudulent transaction using the blockchain since all eyes are on all transactions. Think of it like the IRS conducting a complete audit of your entire tax return. They will see all of your records and they will more than likely catch any attempt at evading payment of taxes. Except in the case of blockchain, there is no IRS or any other central authority—instead, numerous public "validators" (basically members of the public trying to earn lucrative rewards for verifying transactions) do the auditing independently. Another way of thinking about it is that it is like crowd-sourced auditing of all of the transactions on the blockchain.
So in effect, blockchain ensures that you can “trust” that transactions that appear on the blockchain are correct and have actually occurred exactly as stated. Blockchain can be adapted to many different purposes—for example, I believe there are some companies working on applying blockchain to recording real property records, so that we may potentially never have to pay lawyers for title searches ever again (sad for me—I know) because we could just look up the records on the blockchain and know they are accurate and incapable of being manipulated by bad actors. There are innumerable possible applications of blockchain to secure and make our information immutable, which is why there is now a blockchain craze and many new blockchain startups. In many ways, it is like being back in the 80s and 90s with the start of the internet. Why is that important, and how does that relate to cryptocurrency?
Cue: Bitcoin. Bitcoin is an adaptation of blockchain technology to financial transactions. In fact, all cryptocurrencies are adaptations of blockchain-type technology to financial transactions. What is important to note about Bitcoin is the name is very misleading, which is an unfortunate aspect of its adoption by the public: there is no “coin.” Bitcoin is not physical. There is no metallic cylindrical object you get when you receive a “Bitcoin.” You cannot hold it in your hands. Bitcoin exists ONLY on the internet. This is very difficult for some people to understand. It is simply an unfortunate name for that particular distributed ledger.
But if you can get past the idea of a physical “coin” you will realize that you are actually very familiar with concept of money that lives only on the internet. If I told you that you could not use cash for any transaction for the next month, but that you could only use your credit/debit cards and your online bank accounts, could you live your life that way? With the exception of going to an old-school coin laundry, I imagine most people would say yes, they could survive without physical money. They would pay for things using their credit cards, their corresponding credit card account balances would increase, and at the end of the month they would pay their credit cards off by making an online transfer from their bank account to their credit card company and—voila, they can repeat the next month. Your money largely ALREADY lives on the internet. When you get a loan from a bank, they don’t hand you a duffel bag full of cash—they simply add numbers to your accounts and record that transaction in a statement given to you. Bitcoin and other cryptocurrencies are no different.
If you think of a single Bitcoin (abbreviated BTC) like a single dollar, each Bitcoin is made up of numerous “cents” that add up to one Bitcoin. The “cents” that make up the Bitcoin are called “Satoshis” and instead of 100 cents making up a dollar, there are 100 million Satoshis making up one Bitcoin. Hence, you don’t need to own a full Bitcoin to conduct transactions. You can own part of a Bitcoin (which is why you see things often denominated as being worth 0.00004 BTC or some other decimal number). When you “pay” for something using your Bitcoin (or Satoshis), your Bitcoin account balance decreases. When you receive Bitcoin (or Satoshis) for something, your Bitcoin account balance increases. It is really that easy.
So, how does Cryptocurrency actually work—I’ll keep it simple.
Each person who wants to use a cryptocurrency creates a “public address” on the ledger for that particular cryptocurrency, which for illustrative purposes is like the physical address of your bank that everyone can look up by going to a search engine. Each public address has a “private key” generated for you which is similar to the physical key that accesses your safety deposit box at that bank. You keep your cryptocurrencies in that virtual safety deposit box. The ONLY person who can access that virtual safety deposit box is the person who knows the private key. In other words, DO NOT EVER GIVE ANYONE ELSE YOUR PRIVATE KEY. Whoever has the private key owns the cryptocurrency at that address. It is that simple. The moment you give someone (or someone steals) your private keys, you are at risk of losing all of the cryptocurrencies in that account because that person can send the cryptocurrencies to their own virtual safety deposit box neither you nor the police can access. Conversely, if you lose or misplace your private key, it is very likely you will NEVER have access to your virtual safety deposit box ever again.
You may be thinking that could be dangerous, and you would be right. Yes, it is financially risky to have that much reliance on the private key, which is why many people with cryptos have more than one cryptocurrency address and have multiple methods of securing their private keys. That is the price you pay for being your own bank. And you may have heard recently about the early Bitcoin users who had thousands of Bitcoins in their virtual safety deposit box worth millions upon millions of dollars, and now they can’t access it. That is because they lost the private key. They can see their fortune in Bitcoin at the public address, but they have no way to get into the safety deposit box. It is likely lost forever. That is very sad for them.
Also, let me quickly dispel some of that angst about privacy regarding your transactions on a public ledger. As discussed above, when you use a cryptocurrency, you receive a special cryptographic address, so transactions on the ledger look somewhat like this: (Address 938rj3ifoegrnu9df0in4g sent 0.444 BTC to Address 8934iugetfdijo24geno). It does NOT say (Anthony Garcia sends 0.444 BTC to John Doe). Hence, it is still very private even though the transactions themselves are public. Only the people who know which address is associated with what individual can identify you (which is why the criminals loved it). Though you can obtain cryptocurrency addresses anonymously, governments have recently been enforcing strict KYC (Know-Your-Customer) identification requirements on cryptocurrency exchanges, so if you want to buy/sell cryptocurrencies using those exchanges, you may ultimately end up identified at least by a few entities (but not the public at large unless your association to an address is made public).
Further, cryptocurrencies are still being developed. There are some emerging exceptions, but for the most part, Bitcoin users can only conduct transactions with other people that are also on the Bitcoin ledger. Think of Bitcoin like Wells Fargo—in this instance, Wells Fargo account holders can, for the most part, only wire money to other Wells Fargo account holders. If you think of another cryptocurrency, let’s take Cardano (ADA) for example, as being Chase Bank, it is currently quite difficult to have wire transactions between Wells Fargo and Chase Bank. There are some complex solutions that make it possible, but for the average user, it is still beyond easy comprehensible reach in my opinion. If you are interested, some cryptocurrencies incorporate other blockchain functionality that enables “smart contracts” to be formed, which are self-performing contracts, and which allow the WF-Chase bridge to occur. Ethereum is one other well-known example of a cryptocurrency incorporating smart-contract features. Cardano (ADA) is another lesser-known version.
Ok, now how do you go about buying a cryptocurrency and paying invoices to my firm with it?
You must first sign up to a “cryptocurrency exchange”, which for all intents and purposes is like a FOREX exchange or like the NASDAQ. That cryptocurrency exchange has to deal in the cryptocurrency you want to buy. Once you sign up for the exchange, you wire USD to that exchange from your bank. You can then place an order to purchase whatever amount of cryptocurrencies (or parts of a cryptocurrency) you want to buy that has a USD-pair (meaning that you are allowed to exchange USD for the desired crypto). To make the process simple, nearly every exchange will let you do this at market price for a fee paid to the exchange, but if you really want to save money on a transaction, you can place a limit order at a specified price, but essentially you have to have a somewhat adept knowledge of how to trade (like on the stock market). Once the trade executes, shazam! You now are the proud owner of a cryptocurrency (or part of one).
Arguably the most reputable exchanges out there are “Coinbase” and "Binance," both of which have a lot of different cryptocurrencies to buy and sell.
From there all you have to do is to “withdraw” or “send” the cryptocurrency you wish to use to pay your invoice to my firm’s public address for the specified cryptocurrency (which you can ask me for).
If not immediately trading or disposing of your crypto, for reasons of security and safety of funds, the recommended safest thing to do is to move your cryptocurrency to your own secure “hardware wallet”, which is effectively a specially made device that looks like a USB-thumb drive that keeps your private keys safe from prying eyes and off the internet. You may also hear it referred to as “cold storage.” A company out of France called “Ledger” sells the industry’s most reputable hardware wallet devices known as “Nanos.” Keeping your cryptocurrencies on the exchange you bought it from is called “hot storage” because you are relying on the exchange itself to keep your cryptocurrencies safe, which is bit more risky because exchanges are always trying to be hacked by evil-doers. Sometimes those hackers succeed. Sometimes the less-reputable exchanges themselves are the bad actors who steal your cryptocurrencies.
If this all sounds interesting, exciting, and kind of like the Wild West it's because it is! Dealing with cryptos is still largely in its infancy, much like the original functionality of email or trying to use dial-up to get onto the internet. Just as there has been massive advances in our ability to interact with the internet, I suspect in the near-to-mid future cryptocurrencies will also be made to be easier for the common person to use without having to understand how it all works (just like you don’t need to know how a credit card company processes its transactions on the back end in order for you to use a credit card). But for now, this is how it must be done. It is clunky, but it’s what we have to deal with.
(To the moon!)